Rev. Proc. 99-17: Accounting for Package Design Costs

Revenue Procedure 97-35 provides guidance from the Internal Revenue Service (IRS) for businesses changing how they account for the costs of creating product packaging. Package design costs include the development of graphic arrangements, unique shapes, color schemes, and lettering for a product’s container or wrapper. For in-house designs, these costs include materials, labor, and associated overhead, while for external firms, it covers all billings for the design’s development. While general procedures for automatic accounting changes exist, Rev. Proc. 97-35 provides specific, streamlined rules for package design costs. This allows businesses to align their tax accounting with one of three permissible methods without seeking explicit consent from the IRS.

Accounting Methods for Package Design Costs

Under Rev. Proc. 97-35, a business can change its accounting for package design costs to one of three methods provided by the IRS. Each method treats the timing and recovery of these costs differently, offering flexibility for a company’s financial situation. The selected method directly impacts when a business can deduct these expenses and influences its taxable income.

The Capitalization Method

With the capitalization method, all costs to create a package design are capitalized and recorded as an asset rather than being immediately expensed. This asset is not subject to amortization or depreciation. The business can only recover these capitalized costs through a tax deduction when the package design is disposed of or formally abandoned. For example, if a company spends $50,000 on a design for a new product, that amount is held as an asset. If the product is discontinued five years later and the packaging is abandoned, the company can then deduct the full $50,000.

The Design-by-Design Capitalization and Amortization Method

The design-by-design capitalization and amortization method requires capitalizing costs for each package design. The business then amortizes, or gradually deducts, these costs over a 60-month period, beginning the month the design is placed in service. For instance, if a business incurs $30,000 in costs for a design placed in service in July, the monthly amortization would be $500. For that first tax year, the business could deduct $3,000. If the design is disposed of before the 60-month period ends, the remaining unamortized balance can be deducted in the year of disposition.

The Pool-of-Cost Capitalization and Amortization Method

The pool-of-cost capitalization and amortization method allows a business to group all package design costs from a single tax year into one asset pool. This pool is then amortized over 48 months. For example, if a company incurs $120,000 in costs for several designs in one year, the entire amount is capitalized as one pool. The amortization for this pool would be $2,500 per month. A distinction of this method is that if a design from the pool is abandoned, no loss deduction is permitted for its unamortized cost, and the pool’s amortization continues unchanged.

Eligibility for Automatic Consent

To use the simplified process under Rev. Proc. 97-35, a taxpayer must meet specific eligibility criteria. The primary condition is that the change must be from an existing accounting method for package design costs to one of the three acceptable methods: the capitalization method, the design-by-design amortization method, or the pool-of-cost amortization method.

A primary limitation is the five-year rule. A taxpayer is ineligible for this automatic change if they have made a prior accounting method change for package design costs within the five taxable years ending with the year of the proposed change.

Certain circumstances disqualify a taxpayer from using the automatic consent procedure. A business cannot use this process if it is currently under examination by the IRS, unless it obtains a consent letter from the examining director. Similar restrictions apply if the accounting for package design costs is an issue before an appeals office or a federal court, unless the appropriate official grants permission.

Information and Calculations for Form 3115

Making the change requires filing Form 3115, Application for Change in Accounting Method. When filing under Rev. Proc. 97-35, the taxpayer must include specific information, including Designated Change Number (DCN) 229, which identifies this particular automatic change.

A statement must be attached to the Form 3115. This statement needs to be labeled with the taxpayer’s name and identification number and must explicitly reference that the change is being made pursuant to Rev. Proc. 97-35.

A component of Form 3115 is the Section 481(a) adjustment. This is a cumulative calculation required to prevent duplicating or omitting deductions when switching accounting methods. The adjustment represents the difference between the total package design costs under the former method and the amount that would have been treated under the new method for all prior years.

For example, assume a business improperly expensed $200,000 in package design costs over several years. It now changes to the pool-of-cost method and calculates that the cumulative amortization for prior years should have been $75,000. The Section 481(a) adjustment would be a positive $125,000 ($200,000 expensed minus $75,000 that should have been amortized), representing the total amount of previously overstated deductions.

The treatment of this adjustment depends on whether it is positive or negative. A positive adjustment, which increases taxable income, is spread over a four-year period, beginning with the year of the change. A negative adjustment, which decreases taxable income, is taken into account entirely in the year of the change.

Filing for the Change in Accounting Method

Once Form 3115 is completed, the taxpayer must attach the original, unsigned form to their timely filed federal income tax return for the year of the change. For example, for a change made in the 2025 tax year, the original form would be filed with the 2025 tax return, typically in 2026.

In addition, a copy of the signed Form 3115 must be filed with the IRS in Ogden, UT. This filing must occur no earlier than the first day of the year of change and no later than the date the original form is filed with the tax return.

Because this is an automatic change procedure, the IRS does not issue a formal consent letter, as consent is considered granted automatically if the taxpayer complies with all provisions. Once the form is properly filed, the taxpayer receives audit protection. This means the IRS cannot compel the business to change its accounting method for package design costs for any year prior to the year of the change.